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4 Overvalued Retailers to Avoid in April

Low foot traffic and a booming e-commerce industry have compelled many retail companies to create strong online portals and delivery systems to stay afloat in the “new normal.” However, the progress made here by many retailers and an expected revival of foot traffic with the reopening of the economy have attracted significant investor attention to retail stocks, in some instances leading to a disconnection of their price levels from their fundamental strength. Considering their fundamental strength and near-term growth prospects, we think Lululemon Athletica (LULU), V.F. Corporation (VFC), Burlington Stores (BURL), and Burberry (BURBY) now look significantly overvalued. So, it’s wise to avoid these stocks.

After suffering a major setback from a near halt in  store sales and strong competition from existing e-commerce players in the first half of last year, many retail companies have  now adopted online platforms and efficient delivery mechanisms to stay afloat. Now that the economy is reopening, these companies’ brick and mortar stores sales have started recovering too.  Furthermore, the $1,400 direct stimulus checks paid out by the federal government have contributed to a favorable backdrop for retailers through increased consumer spending.

These factors have buoyed investors’ optimism about  the retail space over the past few months. This is evidenced by  the SPDR S&P Retail ETF’s (XRT) 70.5% returns over the past six months versus SPDR S&P 500 Trust ETF’s (SPY) 21.4% gains over this period.

However, many retail stocks have moved too far too fast based solely on investor optimism, and their financials and growth prospects don’t justify their current price levels. With weak fundamentals and growth prospects, Lululemon Athletica Inc. (LULU), V.F. Corporation (VFC), Burlington Stores, Inc. (BURL), and Burberry Group plc (BURBY) currently look overvalued. So, we think they are best avoided now.

Click here to checkout our Retail Industry Report for 2021

Lululemon Athletica Inc. (LULU)

LULU designs, manufactures, and distributes men’s and women’s athletic apparel and accessories. The company operates through two segments— corporate-owned stores and direct-to-consumer. It also offers fitness-related accessories. The company sells its products through its lululemon and ivivva-branded stores, outlets and warehouse sales, a network of wholesale accounts, such as yoga studios, health clubs, and fitness centers, and through mobile apps and e-commerce website.

In an announcement dated April 20, LULU unveiled two new initiatives under its Impact Agenda program that focuses on achieving sustainability by 2030. Through a partnership with TROVE, LULU’s “Like New” re-commerce program allows people to donate their used clothes in exchange for e-gift cards for online re-commerce and recycling. This program will be launched in May in California and Texas. LULU will also launch its limited-edition Earth Dye collection, made with earth-friendly dyes, this May.

For the fourth quarter, ended December 31, 2020, LULU’s selling, general and administrative expenses increased 38.2% year-over-year to $544.83 million. Its adjusted operating margin decreased 290 basis points to 26.9%.

The company  opened eight new stores and closed two stores in the fourth quarter. Its  total liabilities and stockholders' equity were  $4.19 billion, which represents a rise by 27.5% year-over-year.

In terms of forward non-GAAP price/earnings, LULU is currently trading at 48.95x, 157.8% higher than the industry average 18.99x. And in terms of its forward EV/sales, the stock is currently trading at 7.23x, 328.3% higher than the industry average 1.69x.

LULU has declined  6.5% over the past three months and 6.1% year-to-date. It closed yesterday’s trading session at $326.68.

LULU’s POWR Ratings are consistent with this bleak outlook. The stock has a D grade for Value. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

We have also graded LULU for Stability, Sentiment, Momentum, Quality, and Growth. Click here to access all of LULU's ratings.

LULU is ranked #27 of 66 stocks in the B-rated Fashion & Luxury industry.

V.F. Corporation (VFC)

VFC is engaged in the design, production, distribution and marketing of branded lifestyle apparel, footwear, and accessories in the Americas, EMEA and APAC. The company operates through 4 segments—Outdoor, Active, Work and Other. Its popular brands are The North Face, Vans, Timberland, and Kipling. The company sells its products primarily to specialty stores, department stores, national chains, as well as  through direct-to-consumer operations.

On April 6, VFC’s Northern European subsidiary began operations at its new multi-million-pound fulfilment center in Bardon, Leicestershire. VFC hopes to provide efficient distribution services for the customers in the U.K. and serve  almost 90% of the market within a day.

In February, VFC  allocated  €493 million in proceeds from its inaugural green bond issued last year to 13 VFC sustainability projects worldwide. As a result, two million trees were planted, the generation of approximately 16,000 metric tonnes of CO2 was  avoided through procurement of sustainable materials, and more than 970 million liters of water was saved through conservation initiatives.

VFC’s financial prospects are not promising, however. The company’s adjusted revenue for its  fiscal year 2021 third quarter (ended December 31, 2020) decreased 5.8% year-over-year to $2.97 billion. And its  adjusted gross profit came in at $1.80 billion, which represented a decline by 8.3% year-over-year. The company’s adjusted operating income of $458.06 million represents a 17.7% decline from the prior-year period. Also, VFC's net income for the fourth quarter was $347.24 million, down 25.3% year-over-year. Its adjusted EPS decreased 19.1% year-over-year to $0.93.

Analysts expect the company’s EPS to decline 50.7% year-over-year to $1.32 for the current year, fiscal 2021. Also, VFC’s revenue is expected to decrease by 12.6% year-over-year for its  current fiscal year, amounting to $9.16 billion.

VFC’s valuation ratios are much higher than their respective industry average. In terms of its forward non-GAAP price/earnings, VFC’s 64.27x is 238.4% higher than the industry average  18.99x. In terms of forward EV/EBITDA, the stock is currently trading higher than the industry average (35.95x versus 12.08x). The stock has gained 1.9% year-to-date and closed yesterday’s session at $87.00.

In our POWR Ratings system, the stock has a D grade for Value. Click here to see the additional POWR Ratings for VFC (Growth, Stability, Momentum, Sentiment, and Quality).

VFC is ranked #48 in the  Fashion & Luxury industry.

Burlington Stores, Inc. (BURL)

BURL is a   retailer of branded apparel and accessories, home goods, baby products and coats in the United States. It also sells  accessories, beauty and fragrance, handbags, jewelry, shoes and watches.

On April 19, Empire State Realty Trust, Inc. (ESRT)  signed a new, long-term office lease with BURL that doubles the company's footprint at 1400 Broadway. With this partnership, BURL hopes to invest more in its  merchandising team as it  progresses with its Burlington 2.0 initiatives, which aim to improve the execution of the off-price sales model.

BURL will make a comeback to North Colorado Springs, with a new departmental store set to open at Chapel Hills shopping center, on May 28. The store was closed in early 2020. BURL will open its new store in the former JC Penney location at Kettleman Lane in Spring 2021.

However, BURL’s total costs and expenses increased 8.1% year-over-year to $2.09 billion for the fourth quarter, ended January 30, 2021. Therefore, its adjusted net income came in at $163.19 million, representing a 31.8% year-over-year decline. BURL’s total liabilities and stockholders’ equity have  increased 21.2% year-over-year to $6.78 billion. Its net cash provided by operating activities was $219.18 million, representing a decline by 75.4% year-over-year. Its adjusted EPS decreased 24% from the prior-year period to $2.44.

Also, in terms of forward non-GAAP price/earnings, BURL’s 45.50x is 139% higher than the industry average 18.99x. Its forward EV/EBITDA of 25.80x is also higher than the industry average 12.08x. BURL has gained 4.9% over the past month and closed yesterday’s trading session at $322.06.

BURL’s poor prospects are also apparent in its POWR Ratings. The stock has a D grade for Value. In addition to the POWR Ratings grades we’ve just highlighted, one can see BURL's ratings for Growth, Stability, Sentiment, Momentum, and Quality here.

The stock is ranked #45 in the Fashion & Luxury industry.

Burberry Group plc (BURBY)

BURBY manufactures, retails, and wholesales luxury goods under the Burberry brand. The company operates through two segments: Retail/Wholesale and Licensing. It offers women's’, men’s, and children’s apparels, as well as accessories. It markets its products through Burberry mainline stores, concessions, outlets, digital commerce, department stores, and multi-brand specialty accounts.

On April 19, BURBY collaborated with ELLE Digital Japan to create an interactive virtual replica of its flagship Ginza store. The initiative  will enable users to navigate around the virtual store and purchase items from its Spring/Summer 2021 collection. Also, BURBY has created an augmented reality (AR) experience named ‘In Bloom’ that allows users to design their own 3D Pocket Bag sculptures. BURBY is improving its digital innovation to enhance user’s research and luxury experience. The AR Pocket Bag experience is available on and on the Burberry app.

Last month, BURBY’s brand ambassador, actress Zhou Dongyu, halted her contract with BURBY, claiming that the company  had not t clearly stated its stance on suspended cotton from Xinjiang.

BURBY’s financial prospects are not promising. The company’s revenue for its fiscal year 2020, ended March 28, 2021, decreased 3.2% year-over-year to £2.63 billion. Its adjusted gross profit was  £433.10 million, which represented a 1.1% year-over-year decline. The company’s  £121.70 million profit represents a 64.1% decline from the prior-year period. Also, its adjusted EPS decreased 4.1% year-over-year to 78.7p. Its net cash flow from operations declined by 22.7% year-over-year to £455.80 million.

BURBY’s valuation ratios are much higher than their respective industry averages. In terms of its forward EV/sales, BURBY’s 3.81x is 124.4% higher than the industry average 1.70x. In terms of forward price/sales, the stock is currently trading higher than the industry average (3.49x versus 1.38x). The stock has gained 0.4% over the past month and closed yesterday’s session at $28.80.

Under POWR Ratings, the stock has an F grade for Growth, and a D grade for Value and Sentiment. Click here to see the additional POWR Ratings for BURBY (Momentum, Stability, and Quality).

BURBY is ranked #58 in the Fashion & Luxury industry.

Click here to checkout our Retail Industry Report for 2021

LULU shares were trading at $338.75 per share on Thursday afternoon, up $12.07 (+3.69%). Year-to-date, LULU has declined -2.67%, versus a 10.63% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.


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